Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA) are two ways employees may choose to set aside money from their paychecks for the use of medical, dental, vision or and pharmacy expenses. Each account has its own benefits, but there are important differences of which you should be aware.
With both accounts is the advantage is that you are allowed to set aside money from your check before it is taxed. This is tax-free money for you to pay your qualifying health expenses with.
If you spend $1000 on health care expenses after you've paid income taxes, then you may have to earn $1300 to have that $1000 to begin with. If you take that $1000 dollars that you are going to spend anyway on medical expenses into an FSA or HSA, that money is not taxed.
The FSA is a spending account, which indicates that you are expected to spend the money you have set aside within the year it is set aside. The HSA is a savings account, meaning, you may save that money until you need it, even if you don't need it until years down the road.
The funds put into a Flexible Spending Account are good for that year, and that year only. Each payday in that specific year, the amount of money you have selected will be deducted from your paycheck and put into an FSA account. This is your contribution. Most FSA plans front-load the funds, which mean the annual amount you chose to contribute is placed in your account on day one. Think of it as an advance on your funds.
There are two ways to use the money you have set aside, one is a using your FSA benefits card at the point of sale, or submitting a reimbursement form. Using the benefits card is by far the simpler and cost effective way to use the funds. After all, if you pay out-of-pocket and then are reimbursed you are not really using pre-tax money.
The key to an FSA is that it is use-it or lose-it. The money you set aside in one year must be spent in that year, or it will be forfeited. Check the current year’s contribution limits set forth by the IRS.
The IRS keeps an updated list of Flexible Spending Account qualified medical expenses.
The Health Savings Account never expires, and can follow you from job to job. Deposits to the account may come directly from your paycheck, or you may make deposits on your own. Most HSA plans are not front-loaded like the FSA. The dollars available to you are what you have actually deposited. As described above, the money saved in an HSA is not income-taxed. Check the current year’s contribution limits set forth by the IRS.
The IRS keeps an updated list of Health Savings Account qualified medical expenses.
HSA plans are only those who have high-deductible health insurance plans. The rules about how high that deductible must be, and how much can be saved vary from year to year. However, please note that if you leave a job where you had an HSA and move to a job where one is not offered, the funds from that account are still available, you just can no longer contribute to it.
When an employee begins to receive Medicare coverage, they are no longer eligible to contribute to an HSA.
Knowing these differences is important because you have the potential to save thousands of dollars in taxes. If you have any certain questions on any of your medical plans, contact your Human Resources office.
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